Providing capital to profitable fast-growth firms

In exchange for a significant minority ownership, GC investors provide financial resources (usually USD 50 to 200m) to companies with a proven business model, that are usually EBITDA (earnings before interests, taxes, depreciation and amortisation) positive and exhibit organic revenue growth exceeding 10%. At this stage of their development, companies often require external funding. This is because they are unable to generate sufficient cash to finance a transformational event, such as a significant acquisition or expanding abroad. They are not good candidates for additional credit, since their earnings are not stable and/or sufficient enough, their debt level might be too high, and/or their project is deemed too risky for creditors. This is why they are usually not a target either for an LBO.

The majority of GC investments are in non-listed companies, but listed investments are also possible through private investments in public equity (PIPE). In that case, the company stays public and places new shares privately. PIPE investors sell their stakes on the open market once the value created through transformation is reflected in the company’s share price.

An often-overlooked strategy

GC has grown in the shadow of VC and LBO. On average, over the period from 2000 to 2024, GC has collected only 17% of the capital raised in PE. This may come as a surprise, given that GC seems to have the required qualities to be an attractive option for investors. 

Indeed, GC finances companies that are more mature than start-ups financed by VC. As a result, GC investments usually carry lower technology risk and limited or no adoption risk. This reduced risk is reflected in the loss ratio of GC investments, which stands at around 15%. In contrast, the loss ratio for VC investments is 23%, or nearly 50% higher. This suggests that GC investing is less risky than VC, making it potentially a more stable choice for investors.

GC also invests in companies that are often in sectors growing faster than the overall economy, and with strong intrinsic growth prospects. GC investments as a result have a higher return potential than LBOs and without the use of financial leverage. For example, the most recent mature funds, which were created between 2006 and 2015, returned 2.15 times (x) the capital invested in GC net of fees and costs. To put this into perspective, LBO funds returned 1.70x and VC funds 2.98x. 

A middle ground strategy

How does GC compare to VC and LBO? VC stands out when it comes to capturing hyper-growth, notably when the economy is in full throttle; and LBO would be the preferred choice when building portfolios that can weather diverse market conditions. GC occupies a middle ground, offering growth potential and stability. Additionally, when compared historically to major indexes, GC funds have outperformed by around 400 bps, confirming that GC could be a strategy that combines performance and stability.

A useful addition to a private markets program

GC can be valuable in building a resilient and growth-oriented investment program in private markets. This strategy appears to be a nice complement to an all-weather portfolio, with the additional bonus of performing better in periods of economic turbulence such as the global financial crisis of 2008-2009 and the subsequent economic recovery.

Given its unique features, investors have increasingly incorporated GC into their asset allocations. As a result, the strategy has been progressively catching up and has attracted capital at a faster pace than other private equity strategies. Annual growth rates were respectively 21.5% for GC and 9.6% for PE (excluding GC) between 2000 and 2024.

Patience and a certain appetite for risk required

GC investing requires some patience, as the returns may take time to materialise. While LBO funds returned capital on average after a little over 5 years during the period 2006 to 2015, GC funds required almost 6 years to return capital, and VC funds required almost 7. 

GC investing involves risks that are commensurate with the potential returns. As referred above, the loss ratio was historically higher than 15%, above LBO’s (13.1%). Likewise, GC has a slightly wider dispersion of fund manager performance than in LBO. For patient investors with the right risk appetite, and who possess the necessary selection skills, GC can be a valuable addition to diversified all-weather portfolio, especially during periods of economic turbulence.

Please refer to the Private Markets Glossary for more information.